THE DIAMOND TRADE

SHIFTING PRICES REFLECTS CHANGES IN DIAMOND TRADE

As it does ten times a year, toward the end of January De Beers reported the results of its latest sales cycle. In a statement released to the media, the company announced that it has sold rough diamonds to the value of $505 million through its regular sightholder clients and via tender sales, compared with $672 million in January 2018 and $729 million in January 2017.

For rough diamond producers January traditionally has been considered a stronger month, as stocks in the trading centers need to be built up stock after the crucial holiday season. Consequently, a precipitous fall in sales would ordinarily be seen as a sign of waning confidence in the marketplace. But De Beers pointedly noted in its announcement that the reduction in sales can specifically be traced to a glut of smaller and less expensive stones.

“Rough diamond-sales during the first sales cycle of 2019 were lower than those for the equivalent period last year, reflecting higher-than-normal sales in the previous cycle…and the slow movement of lower-value rough diamonds through the pipeline,” stated the company’s CEO Bruce Cleaver.

SYNTHETICS A CRITICAL FACTOR AT MARKET’S LOWER END

The price of lower-range stones has been weak for some time already. In November De Beers announced that it was reducing prices for smaller and less expensive goods by as much as much as 10 percent. This followed a decision in September to allow sigholders to defer to defer purchases.

The increasing volatility at the bottom end of the market is in quite strong contrast to the stability that is evident in the mid-range and higher end, and quite possibly is reflective of the incremental pressure being brought bear on this sector by the rising availability of synthetic diamonds.

The pressure on prices at the lower end of the market was not unexpected. Already in 2016, a report released by analysts at Morgan Stanley suggested that synthetic diamonds would become a “serious potential disruptor” in the diamond market, with their influence most felt mainly smaller-sized sector, where melee is handled.

According to the report, the most likely outcome of the development of the synthetic diamond sector is that it takes a limited market share away from lower-cost mined diamonds, where it comprises 15 percent of that sector, as opposed to 7.5 percent of the larger-stone market.

In such a situation the financial services firm report had stated, prices of natural melee would be impacted, but there would be no discernable influence on the price of larger-sized diamonds.

SECOND-LEAGUE ROUGH PRODUCERS FEEL THE HEAT

In its 2016 report, Morgan Stanley had forecast that diamond miners would not only see their bottom lines affected by the low price of melee, but also marketing costs, which will be driven upward by the need to differentiate natural diamonds from synthetics in the eyes of consumers. This, it was suggested, could come to equal 10 percent of income.

Tougher times sometimes breed innovative solutions. According to a report in December that appeared in Forbes magazine, the German investment bank Behrenberg has been pushing four such mining companies – Gem Diamonds, Petra Diamonds, Lucara Diamond Corporation and Firestone Diamonds – into a four-way merger, which would not quite put them on the same level as De Beers or Alrosa, but would allow them to control 5 million carats a year of production, which is equivalent to 3 percent of global output and 8 percent of diamond supply by value. The new business, if it ever comes to be, have annual revenue of around $1.1 billion at current value, and a free cash flow of about $200 million.

More importantly, said the German bank, it would create a company that is better equipped to operate in the evolving market environment. This is because Lucara Diamond and Gem Diamonds, with Petra and Firestone producing higher volumes of mid-range merchandise.